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ARTICLE · 05 JULY 2023

Demystifying The FLDG Regime

Khaitan & Co.
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The Reserve Bank of India (RBI) by way of a circular issued ‘Guidelines on Default Loss Guarantee (DLG) in digital lending' on 8 June 2023 (DLG Guidelines)...

IndiaFinance and Banking
Prashanth Ramdas
Prashanth Ramdas
Smita Jha
Smita Jha
Sharad Abhyankar
Sharad Abhyankar
Saranya Mishra
Saranya Mishra
Ishani Sahai
Ishani Sahai
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The Reserve Bank of India (RBI) by way of a circular issued 'Guidelines on Default Loss Guarantee (DLG) in digital lending' on 8 June 2023 (DLG Guidelines), provided the much needed legitimacy to default loss guarantee (also known as first loss default guarantee (FLDG)) between a regulated entity (RE) (such as a bank or non-banking financial company (NBFC)) and lending service provider (LSP) (typically an unregulated fintech) or inter se REs, with some qualifiers and conditionalities.

FLDG as a concept

Simply put, FLDGs are risk sharing arrangements between an RE and an LSP, whereby default on loans extended by REs to borrowers originated through the LSP are guaranteed by the LSP. FLDGs are provided in various forms which, inter alia, include funded risk participation by way of cash deposits or non-funded risk participation in form of corporate guarantees or bank guarantees, and even a combination of funded and non-funded risk participation. The risk

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